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Business Law Update: Michigan Supreme Court’s May 15, 2017 Decision on Minority Oppression

 

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims.

It has been almost 3 years since the Michigan Supreme Court issued its Opinion in the  Madugula v Taub  case on Michigan’s shareholder/member oppression statutes.

The Madugula clarified that a claimant is not entitled to a jury a trial undmoney-73341_640er the Act; and breach of a Shareholder/Operating Agreement can be evidence of “oppressive” conduct.

On May 15, 2017 the Michigan Supreme Court issued its Opinion in Frank, et al v. Linkner, et al.

In summary, the Supreme Court held:

  • that MCL 450.4515(1)(e) provides alternative statutes of limitations, one based on the time of discovery of the cause of action and the other based on the time of accrual of the cause of action; and
  • That a cause of action for LLC member oppression accrues at the time an LLC manager has substantially interfered with the interests of a member as a member, even if that member has not yet incurred a calculable financial injury. See Frank, id. page 1.

 

The facts of Frank are admittedly, interesting (and unfortunate if you are the Plaintiffs):

Facts:

  • Defendant ePrize was founded by defendant Joshua Linkner in 1999 as a Michigan LLC specializing in online sweepstakes and interactive promotions.
  • Plaintiffs are former employees of ePrize who acquired ownership units in ePrize.
  • Plaintiffs allege Linkner orally promised them that their interests in ePrize would never be diluted or subordinated.
  • In 2005, plaintiffs’ shares in ePrize were converted into shares in ePrize Holdings, LLC.
  • In 2007, ePrize ran into financial difficulties and required an infusion of cash.
  • To remedy this problem, ePrize obtained $28 million in loans in the form of “B Notes” from various defendantmembers of ePrize and other investors;
  • plaintiffs were not invited to participate in these investments.
  • In 2009, ePrize remained struggling to meet its loan obligations and therefore issued new “Series C Units.”
  • These units were offered to various investors, including those who had obtained B Notes.
  • In exchange for the Series C Units, investors were required, amo
    ng other things, to make capital contributions, guarantee a portion of a $14.5 million loan from Charter One Bank, and convert their B Notes into “Series B Units.”
  • On August 20, 2012, ePrize sold substantially all of its assets and, pursuant to the Operating Agreement, distributed nearly $100 million in net proceeds to the holders of Series C and Series B Units.
  • Plaintiffs received nothing for their common shares.

Procedural History

Plaintiffs sued on April 19, 2013 alleging among other claims, minority oppression under MCL 450.4515. The trial court dismissed the claims, indicating that they were “untimely” under the 3 year statute of limitation period. The Court of Appeals reversed. This matter then went to the Supreme Court.

 

 

In General – Michigan Minority Oppression Statute

Michigan law provides a cause of action against the shareholders/members who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4515)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;
fraudulent;
or willfully unfair and oppressive to the corporation or to the shareholder.” 
“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the corporation.
(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation…
Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.
Back to the Supreme Court’s Decision in Frank…
a. Statute of Limitations
The Supreme Court agreed with the Court of Appeals that:
“MCL 450.4515(1)(e) contains two alternative statutes of limitations:”
1. (2 years) predicated upon discovery of the cause of action and
2. the other (3 years) predicated upon accrual of the cause of action. Id. at pg 6.
The Supreme Court clarified that under the statute “A plaintiff has two years from the time he or she ‘discovers or reasonably should have discovered the cause of action” to bring a claim [under the minority oppression statute]”. Id pg 13. “…a plaintiff cannot bring a claim three years after accrual of the cause of action, even if he or she did not discover and reasonably would not have discovered the cause of action during that period.”
b. when does an oppression claim accrue?
The Plaintiffs/minority members argued that their claims “did not accrue until they first incurred a calculable financial injury after ePrize sold substantially all of its assets in 2012.” Id. pg 16. They reasoned that no monetary damages occurred until the company was liquidated. Id.
The Supreme Court, however reasoned that the “plaintiffs’ argument conflates monetary damages with ‘harm'”.  The Court held that:
the actionable harm for a member-oppression claim under MCL 450.1515 consists of actions taken by the managers that “substantially interfere with the interests of the member as a member,” and monetary damages constitute just one of many potential remedies for the harm.
Therefore, the Court held that :the Court of Appeals erred by focusing on the availability of monetary damages, rather than on when plaintiffs incurred ‘harm’.” The Court reversed the Court of Appeals on this issue. Id. 17.
“Once a plaintiff proves that a manager engaged in an action or series of actions that substantially interfered with his or her interest as a member, the “harm” has been incurred, and therefore the claim has accrued.” Id.
Application 
In application, the Supreme Court therefore found that the alleged harm occurred when the minority members’ interest were subordinated (in 2009) by amendment of the operating agreement and not when the sale occurred (in 2012). Id. at 20.
So, unless plaintiffs can show fraudulent concealment, Plaintiffs’ claims for monetary damages are barred.

 

Take away for Business owners/Investors/Entrepreneurs:

 

1. Get an attorney involved before the business relationship begins and clearly document the business relationship, especially your shareholder/operating agreement. That will contain the exit strategy and relevant buy-out language. Further, any conduct the parties agree to in their shareholder/operating agreement will not be deemed “oppressive”. However, a breach of the agreement, may deemed interference with your rights sufficient to constitute “oppression” however, this is based on a highly fact-intensive analysis.

2. If you believe you are being frozen out of control/profits in a business – do not wait. The Michigan Supreme Court has held that your claim accrues when the harm occurs. Learn from the Frank Decision.  Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

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LINC Real Estate Development News, and Lessons from Recent Court Decision

Happy Friday!

News in local real estate development….

Yesterday, the Grand Rapids Planning Commission approved a $15 Million Project. Article here.

The Project, 70 housing units with retail on the first story, is being developed by LINC – a Grand Rapids based non-profit focused on Community Revitalization.

LINC is great example of a local non-profit doing good work in community revitalization. LINC, per its website defines its views on economic development efforts for local communities:

“to develop the entrepreneurial spirit of our community, boost business ideas and expand the business base of our communities, thus creating viable businesses that strengthen the fabric of our neighborhoods”

Business can strengthen local neighborhoods. That’s what local business should do.

I blog a lot about crowdfunding, and how I believe it has potential to be a tool for social entrepreneurship and community revitalization.

On the flip side, I am always reminded that any time an investor is considering taking part in a local project, they should take great care to perform their own due diligence. They need to understand the risks of what they are buying into.

Lessons for Investors in Real Estate Development: The Dinoto Case.

This morning I was reading a court case decided on May 21st,  regarding a dispute between an investor and a developer (and its various entities).

Dinoto v Nu Way Investments, LLC, et al

You can check out the case here

Brief facts;

  • Dinoto was an investor in a real estate development company owned by a relative of his.
  • Dinoto’s investment was apparently intended to fund the purchase and development of commercial real estate.
  • Ultimately, Dinoto lost his entire investment, and the real estate was foreclosed on.
  • Dinoto thereafter sued for an “Accounting” – apparently he suspected his money had been misused.
  • After undergoing discovery, Dinoto wanted to amend his lawsuit to file various claims for breach of fiduciary duty, embezzlement, and to pierce the corporate veils of various affiliate entities.
  • Ultimately his case was dismissed. The Court of Appeals affirmed the decision.

Lesson from Dinoto

I don’t believe there is any real significant legal holding that came out of this case.

I do think it provides a practical warning for investors in real estate.

Perform your due diligence ahead of time – not afterwards.

Dinoto apparently invested in the project and asked questions later. When it was too late. Finding out answers to key questions is not best left for your lawyer via a lawsuit – where it is going to cost you potentially your entire investment, plus additional tens of thousands of dollars in legal fees.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com